In the current issue, we delve into the transformative changes coming to the taxation landscape in 2024, with a specific focus on the taxation of individuals' business income.
According to the new Law no. 29/2023 dated 30.03.2023 "On Income Tax", the business income of the individuals (self-employed or entrepreneurs) will be governed by the provisions regulating the section of the Personal Income Tax. The existing Income Tax legislation previously has included the taxation of the business income of individuals based on the compliance rules of simplified income tax. Later on, the taxation of such income has been governed by local taxes legislation whereby the municipalities were the competent authority for the tax collection. With the implementation of the new Law, the governance of the taxes of individual businesses is expected to be shifted to the central tax administration.
Based on the new Income Tax Law, the following categories of income realized by individuals shall be considered as business income, to the extent they are not categorized as employment income:
- Income from any kind of business activity including the activities of self-employed and entrepreneur individuals;
- Interests, dividends and royalties which are effectively related to the business activity;
- Income from the sale of securities, which are effectively related to the business activity;
- Income from the lease of whole or part of tangible or intangible assets of the business activity;
- Income from the sale of assets and/or liabilities, including the sale of business activity;
- Capital gains realized from the sale or disposal of all or part of business assets as a result of a business reorganization process;
- Gifts, grants or subsidies, received by an individual in relation to the business activity;
- Income deriving from technical or digital automated services;
- Capital gains from revaluation of business assets when these assets are given as a contribution in kind to the capital of a company (either for the incorporation or capital increase);
- Income deriving from transactions with virtual assets or mining of virtual assets effectively related to the business activity.
The taxable income from business activity is determined by deducting from the overall income realized the expenses made for the purposes of creating and preserving the profit.
Determination of the taxable income
Entrepreneurs or self-employed individuals with annual business turnover up to ALL 10,000,000 may elect to deduct business expenses using flat rates depending on the type of activity performed without the necessity to be verified by a tax audit for their accounting records. Otherwise, they may choose to calculate the taxable income by deducting the actual business costs supported with the relevant tax documentation for any expense incurred. The taxpayers electing one or the other method are required to notify the elected option to the tax authorities and they are allowed to change this method only once in a three-year period.
The flat rates of the presumed deductible expenses vary as follows:
- 60% of the revenue for manufacturing activities;
- 90% of the revenue for wholesale trading activities;
- 70% of the revenue for the retail and individual transport activities;
- 60% of the revenue for the activities of coffee, restaurants, discos, etc.;
- 50% of the revenue for services, artisanal and craft activities
- 30% of the revenue for self-employed individuals;
Individuals choosing to report their taxable business income based on the flat rate of deductible expenses are not allowed to claim any other deduction except for the following annual personal deductions:
- Annual deduction of ALL 600,000, if the annual income is up to ALL 600,000
- Annual deduction of ALL 420,000, if the annual income falls between ALL 600,000 to ALL 720,000;
- Annual deduction of ALL 360,000, if the annual income is over ALL 720,000;
- Annual deduction for any dependent child (<18 years old) at the amount of ALL 48,000;
- Annual deduction for any dependent child (<18 years old) for educational expenses capped at ALL 100,000 if the parent earns an annual employment income up to ALL 1,200,000.
The new law provides for a different method of taxation of the business income as per the following:
- Taxable business income up to ALL 14,000,000 shall be subject to 15% personal income tax;
- Taxable business income over ALL 14,000,000 shall be subject to 23% personal income tax.
Up to 31 December 2029, any entrepreneurs and self-employed individuals realizing an annual turnover up to ALL 14,000,000 shall continue to be subject to 0% tax, while if the said threshold is exceeded, then the business income shall be subject to 15% personal income tax. As an exception from the above rule, starting from 1 January 2024, the self-employed individuals providing professional services as per the list of professions to be approved by the Albanian Council of Ministers will be subject to the new taxation scheme and taxed at 15% or 23% depending on the annual business income.
The personal income tax rates on business income introduced by the new Law, would be uniformly applied to any entrepreneur, self-employed individual and/or specific category of professionals starting from 1 January 2030.
The final settlement of the personal income tax due from the business activity and submission of the respective tax return is by 31 March of the following year. Any allowed deduction as per the specific provisions of the law can be claimed through the submission of the annual business income tax return. The annual business income tax return is expected to be in a different format from the one used by individuals for other types of personal income.